ECON 157 UCI Development Book Report

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th edition, by Todaro and Smith. Pearson. ISBN: 978-1292002972. The review should follow the Guidelines below.

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Chapter 1 Introducing Economic Development: A Global Perspective 1.1 How the Other Half Live • When one is poor, she has no say in public, she feels inferior. She has no food, so there is famine in her house; no clothing, and no progress in her family. —A poor woman from Uganda • For a poor person everything is terrible—illness, humiliation, shame. We are cripples; we are afraid of everything; we depend on everyone. No one needs us. We are like garbage that everyone wants to get rid of. —A blind woman from Tiraspol, Moldova • Life in the area is so precarious that the youth and every able person have to migrate to the towns or join the army at the war front in order to escape the hazards of hunger escalating over here. —Participant in a discussion group in rural Ethiopia Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-2 1.1 How the Other Half Live • When food was in abundance, relatives used to share it. These days of hunger, however not even relatives would help you by giving you some food. —Young man in Nichimishi, Zambia • We have to line up for hours before it is our turn to draw water. —Mbwadzulu Village (Mangochi), Malawi • [Poverty is] . . . low salaries and lack of jobs. And it’s also not having medicine, food, and clothes. --Discussion group, Brazil • Don’t ask me what poverty is because you have met it outside my house. Look at the house and count the number of holes. Look at the utensils and the clothes I am wearing. Look at everything and write what you see. What you see is poverty. —Poor man in Kenya Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-3 1.1 How the Other Half Live • A universal theme reflected in these quotes is that poverty is more than lack of income – it is inherently multidimensional, as is economic development. • Developing or Less Developed countries characterized by low levels of living and other development deficits. E.g. (Asia, Africa, the Middle East, Latin America, eastern Europe, and the former Soviet Union) Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-4 1.1 How the Other Half Live • How should poverty be defined? – the international standard of extreme poverty is set to the possession of less than 1$ a day. (unesco.org) – Poverty is a state or condition in which a person or community lacks the financial resources and essentials to enjoy a minimum standard of life and well-being that's considered acceptable in society. (investopedia.com) – Or maybe: For what does it profit a man to gain the whole world and to lose his soul? (Jesus Christ) – Or possibly pastor Oliver definition: https://www.youtube.com/watch?v=RGSvDvDZnb4 Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-5 1.1 How the Other Half Live • Absolute vs. relative poverty • Absolute poverty A situation of being unable to meet the minimum levels of income, food, clothing, healthcare, shelter, and other essentials. • Relative poverty defines poverty in relation to the economic status of other members of the society: people are poor if they fall below prevailing standards of living in a given societal context. (unesco.org) Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-6 1.1 How the Other Half Live • Development The process of improving the quality of all human lives and capabilities by raising people’s levels of living, self-esteem, and freedom. Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-7 1.2 Economics and Development Studies – Traditional economics An approach that stresses utility, profit maximization, market efficiency, and determination of equilibrium. – Political economy studies the social and institutional processes through which certain groups of economic and political elites influence the allocation of scarce productive resources, either for their own benefit exclusively or for that of the larger population as well — to view economic activity in its political context. Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-8 1.2 Economics and Development Studies – The Nature of Development Economics • Greater scope than traditional neoclassical economics and political economy. • The study of how economies are transformed from stagnation to growth and from low income to highincome status, and overcome problems of absolute poverty. • Development economics must encompass the study of institutional and social, as well as economic, mechanisms for modernizing an economy while eliminating absolute poverty. Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-9 1.2 Economics and Development Studies – Why Study Development Economics? Some Critical Questions • Real meaning of development? (Chapter 1) • What are economic institutions, and their role for successful development? (Chapter 2) • Sources of national and international economic growth? (Chs. 2 & 3) • Most influential theories of development? (Ch. 3) • Causes of extreme poverty? Policies most effective for improving the lives of the poorest of the poor? (Chs. 5, 6, 7, 8) Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-10 1.2 Economics and Development Studies – Why Study Development Economics? Some Critical Questions • Is population growth a threat to economic development (Ch. 6) • High level of unemployment and migration to cities? (Ch. 7) • Richer means more educated and healthier. Is the opposite true? (Ch. 8) • Is trade a driver for economic development? (Ch. 12) • Impact of foreign aid on developing countries (Ch. 14) Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-11 Figure 1.1 World Income Distribution Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-12 1.2 Economics and Development Studies • Economies as Social Systems: The Need to Go Beyond Simple Economics • Social Systems – Interdependent relationships between economic and noneconomic factors such as values, attitudes and traditions. • Success or failure of development policy – Importance of taking account of institutional and structural variables along with more traditional economic variables Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-13 1.3 What Do We Mean by Development? • Traditional Economic Measures – Gross National Income (GNI) – Income per capita – Economies should grow at higher rate than population – Emphasis on GDP – Utility of that income? Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-14 1.3 What Do We Mean by Development? • The New Economic View of Development – Leads to improvement in wellbeing – Values and attitudes – Institutions Norms, rules of conduct, and generally accepted ways of doing things. Economic institutions are humanly devised constraints that shape human interactions including both informal and formal “rules of the game” of economic life Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-15 1.3 What Do We Mean by Development? • Amartya Sen’s “Capability” Approach – The capability to function is what’s important (Functionings as an achievement) – Capabilities as freedoms enjoyed in terms of functionings – Development and happiness – Well being in terms of being well and having freedoms of choice – “Beings and Doings” Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-16 Some Key “Capabilities” • Some Important “Beings” and “Doings” in Capability to Function: – – – – – – – – Being able to live long Being well-nourished Being healthy Being literate Being well-clothed Being mobile Being able to take part in the life of the community Being happy – as a state of being - may be valued as a functioning Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-17 1.3 What Do We Mean by Development? (cont’d) • Three Core Values of Development – Sustenance: The Ability to Meet Basic Needs – Self-Esteem: To Be a Person – Freedom from Servitude: To Be Able to Choose Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-18 Figure 1.2 Income and Happiness: Comparing Countries Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-19 1.3 What Do We Mean by Development? (cont’d) • The Central Role of Women – To make the biggest impact on development, societies must empower and invest in women • The Three Objectives of Development – Increase availability of life-sustaining goods – Raise levels of living – Expand range of economic and social choices Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-20 1.4 The Millennium Development Goals • Millennium Development goals (MDGs) – Eight goals adopted by the United Nations in 2000 • • • • • • • • Eradicate extreme poverty and hunger Achieve universal primary education Promote gender equality and empower women Reduce child mortality Improve maternal health Combat HIV/AIDS, malaria, and other diseases Ensure environmental sustainability Develop a global partnership for development Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-21 Table 1.1 Millennium Development Goals and Targets for 2015 Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-22 Table 1.1 Millennium Development Goals and Targets for 2015 (cont’d) Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-23 1.5 Conclusions • The importance of Development Economics • Inclusion of non-economic variables in designing development strategies • Achieving the Millennium Development Goals • “…One future-or none at all” Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-24 Concepts for Review • • • • • • • • • • Absolute Poverty Attitudes Capabilities Developing countries Development Development economics Freedom Functionings Globalization Gross domestic product Copyright ©2015 Pearson Education, Inc. All rights reserved. • Gross national income (GNI) • Income per capita • Institutions • Less developed countries (LDCs) • Millennium Development Goals (MDGs) • More developed countries (MDCs) • Political economy 1-25 Concepts for Review (cont’d) • • • • • • Self-esteem Social system Subsistence economy Sustenance Traditional economics Values Copyright ©2015 Pearson Education, Inc. All rights reserved. 1-26 Chapter 2 Comparative Economic Development Objectives • Some key development factors such as education gender inequality. • Introduction to the Human Development Index (HDI) and how it is calculated • Introduction to the New Human Development Index (NHDI) and how it is calculated Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-2 Common characteristics of developing countries • These features in common are on average and with great diversity, in comparison with developed countries: – Lower levels of living and productivity – Lower levels of human capital – Higher levels of inequality and absolute poverty – Higher population growth rates – Greater social fractionalization – Larger rural population - rapid migration to cities – Lower levels of industrialization and manufactured exports – Adverse geography – Underdeveloped financial and other markets – Colonial Legacies - poor institutions etc. Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-3 2.1 Defining the Developing World • World Bank Scheme- ranks countries on GNP/capita – – – – LICS: Low Income Countries LMC: Low Middle Income Countries UMC: Upper Middle Income Countries HIC: High Income Countries Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-4 2.1 Defining the Developing World • World Bank Scheme- ranks countries on Gross National Income GNI/capita (2011) • Low Income Countries – GNI/Capita $12476 Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-5 Table 2.1 Classification of Economies by Region and Income, 2013 Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-6 Table 2.1 Classification of Economies by Region and Income, 2013 (continued) Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-7 Table 2.1 Classification of Economies by Region and Income, 2013 (continued) Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-8 Figure 2.1 Nations of the World, Classified by GNI Per Capita Source: Data from Atlas of Global Development, 4th ed., pp. 16-17: World Bank and Collins. 2013. ATLAS OF GLOBAL DEVELOPMENT: A VISUAL GUIDE TO THE WORLD’S GREATEST CHALLENGES, FOURTH EDITION. Washington, DC and Glasgow: World Bank and Collins. doi: 10.1596/978-0-8213-9757-2. License: Creative Commons Attribution CC BY 3.0 Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-9 How to compare income across countries • http://www.open.edu/openlearn/science-mathstechnology/mathematics-and-statistics/howcompare-income-across-countries Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-10 2.2 Basic Indicators of Development: Real Income, Health, and Education • Gross National Income (GNI): – Nation’s gross domestic product (GDP) + net income received from overseas. – Gross national income (GNI) is defined as the sum of value added by all producers who are residents in a nation, plus net income received from abroad such as employee compensation and property income. GNI measures income received by a country both domestically and from overseas. Source: Investopedia . Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-11 2.2 Basic Indicators of Development: Real Income, Health, and Education • Gross National Income (GNI): – The gross national income (GNI) is the total domestic and foreign output claimed by residents of a country, consisting of gross domestic product (GDP), plus factor incomes earned by foreign residents, minus income earned in the domestic economy by nonresidents – GNI is slightly higher than GDP – In some cases GNI is lower than GDP (in case the income received by the country < payments made to the rest of the world) Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-12 2.2 Basic Indicators of Development: Real Income, Health, and Education • Gross Domestic Product (GDP) – Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period. Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-13 Figure 2.2 Income Per Capita in Selected Countries, 2011 Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-14 2.2 Basic Indicators of Development: Real Income, Health, and Education • PPP method instead of exchange rates as conversion factors (see Figure 2.2) • PPP takes into account – International prices for goods and services – Number of units of a foreign country’s currency required to purchase the identical quantity of goods and services in the local developing country market as $1 would buy in the United States Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-15 Table 2.2 A Comparison of Per Capita GNI in Selected Developing Countries, the United Kingdom, and the United States, Using Official Exchange-Rate and Purchasing Power Parity Conversions, 2011 Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-16 2.3 Holistic Measures of Living Levels and Capabilities • Health – – – – life expectancy the rate of undernourishment the under-5 mortality rate the crude birth rate • Life Expectancy at birth • Education: • Adult literacy (male, female) • Gross school enrollment Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-17 Table 2.3 Commonality and Diversity: Some Basic Indicators Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-18 2.3 Holistic Measures of Living Levels and Capabilities • Traditional Human Development Index • HDI as a holistic measure (0 to 1) of living levels – An index measuring national socioeconomic development, based on combining measures of education, health, and adjusted real income per capita. • HDI ranks countries into four groups: – – – – low human development (0.0 to 0.499) medium human development (0.50 to 0.799) high human development (0.80 to 0.90) very high human development (0.90 to 1.0) Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-19 Table A2.1.1 2009 Traditional Human Development Index for 24 Selected Countries (2007 Data) Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-20 Table A2.1.2 2009 Human Development Index Variations for Similar Incomes (2007 Data) Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-21 Figure A2.1.1 Human Development Disparities within Selected Countries Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-22 Figure A2.1.1 Human Development Disparities within Selected Countries (continued) Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-23 2.3 Holistic Measures of Living Levels and Capabilities • The New Human Development Index • Introduced by UNDP in November 2010 • HDI as a holistic measure of living levels Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-24 NHDI • Component index = Country actual achievement – minimum goalpost Divided by Overall max goalpost – min goalpost Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-25 Box 2.1 Computing the New HDI: Ghana Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-26 Table 2.4 2013 New Human Development Index and its Components for Selected Countries Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-27 What is new in the New HDI? 1. Calculating with a geometric mean • How does the New HDI compare with the better-known (but no longer active) Traditional HDI? • Probably most consequential: The index is now computed with a geometric mean, instead of an arithmetic mean • A geometric mean is also used to build up the overall education index from its two components • Traditional HDI added the three components and divided by 3 Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-28 What is new in the New HDI? 1. Calculating with a geometric mean • New HDI takes the cube root of the product of the three component indexes • The traditional HDI calculation assumed one component traded off against another as perfect substitutes, a strong assumption – Higher value for health index for instance would compensate (1 for 1) for a lower value of education index • The reformulation now allows for imperfect substitutability which development specialists widely consider a more plausible way to frame the tradeoffs. Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-29 What is new in the New HDI? 2. Other key changes: • Gross national income per capita replaces gross domestic product per capita • Revised education components: now using the average actual educational attainment of the whole population, and the expected attainment of today’s children • The maximum values in each dimension have been increased to the observed maximum rather than given a predefined cutoff • The lower goalpost for income has been reduced due to new evidence on lower possible income levels Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-30 2.3 Holistic Measures of Living Levels and Capabilities • HDI can be calculated for groups and regions in a country – HDI varies among groups within countries – HDI varies across regions in a country – HDI varies between rural and urban areas Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-31 2.4 Characteristics of the Developing World: Diversity within Commonality • These ten characteristics are common among developing countries – on average and with great diversity - in comparison with developed countries: 1. Lower levels of living and productivity 2. Lower levels of human capital (health, education, skills) 3. Higher Levels of Inequality and Absolute Poverty – Absolute Poverty (deprivation of basic human needs) 4. Higher Population Growth Rates – Crude Birth rates Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-32 Figure 2.3a Shares of Global Income, 2008. (b) Developing regions lag far behind the developed world in productivity measured as output per worker. Source: Figure 2.3a, Data from World Bank, World Development Indicators 2013 (Washington, D. C.: World Bank, 2013), p.24. Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-33 Figure 2.3b Developing regions lag far behind the developed world in productivity measured as output per worker. Source: Figure 2.3b, United Nations, Millenium Development Goals Report 2012, p.9. Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-34 Table 2.5 The 12 Most and Least Populated Countries and Their Per Capita Income, 2008 Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-35 Figure 2.4 Under-5 Mortality Rates, 1990 and 2012 Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-36 Table 2.6 Primary School Enrollment and Pupil-Teacher Ratios, 2010 Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-37 Figure 2.5 Correlation between Under-5 Mortality and Mother’s Education Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-38 Figure 2.6 Number of People Living in Poverty by Region, 1981–2008 Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-39 Table 2.7 Crude Birth Rates Around the World, 2012 Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-40 2.4 Characteristics of the Developing World: Diversity within Commonality 5. Greater Social Fractionalization e.g. deep social division 6. Larger Rural Populations but Rapid Rural-toUrban Migration 7. Lower Levels of Industrialization and Manufactured Exports 8. Adverse Geography – Resource endowments Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-41 Table 2.8 The Urban Population in Developed Countries and Developing Regions Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-42 Table 2.9 Share of the Population Employed in the Agricultural, Industrial, and Service Sectors in Selected Countries, 2004–2008 (%) Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-43 Table 2.10 Share of the Population Employed in the Agricultural, Industrial, and Service Sectors in Selected Countries, 1990–92 and 2008–2011 (%) Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-44 2.4 Characteristics of the Developing World: Diversity within Commonality 9. Underdeveloped Financial and Other markets – Imperfect markets (no perfect competition) – Incomplete information (efficiency?) 10. Colonial Legacy and External Dependence – Institutions – Private property – Personal taxation Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-45 2.5 How Low-Income Countries Today Differ from Developed Countries in Their Earlier Stages • Eight differences – Physical and human resource endowments – Per capita incomes and levels of GDP in relation to the rest of the world – Climate differences – Population size, distribution, and growth Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-46 2.5 How Low-Income Countries Today Differ from Developed Countries in Their Earlier Stages • Eight differences – Historic role of international migration (Brain drain) – International trade benefits • Except for few countries, many developing countries could not benefit from international trade – Basic scientific/technological research and development capabilities – Efficacy of domestic institutions • less political stability and social flexibility Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-47 2.6 Are Living Standards of Developing and Devolved Nations Converging? • Convergence: the catch up effect where developing countries move towards higher income as developed countries • Evidence of unconditional convergence is hard to find • But there is increasing evidence of “per capita income convergence,” weighting changes in per capita income by population size • (Also, in chapter 3, we return to examine the concept of conditional convergence when we study the Solow model) Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-48 Figure 2.7 Relative Country Convergence: World, Developing Countries, and OECD Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-49 Figure 2.8 Growth Convergence versus Absolute Income Convergence Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-50 Figure 2.9 Country Size, Initial Income Level, and Economic Growth Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-51 2.7 Long-Run Causes of Comparative Development • What can explain the variation between developing and developed economies? • Schematic Representation – Geography – Institutional quality- colonial and post-colonial – Colonial legacy- pre colonial comparative advantage – Evolution and timing of European development – Inequality- human capital – Type of colonial regime Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-52 Figure 2.10 Schematic Representation of Leading Theories of Comparative Development Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-53 Nature and Role of Economic Institutions • Institutions provide “rules of the game” of economic life • Provide underpinning of a market economy • Include property rights; contract enforcement • Can work for improving coordination, • Restricting coercive, fraudulent and anticompetitive behavior Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-54 Nature and Role of Economic Institutions • Providing access to opportunities for the broad population• Constraining the power of elites, and managing conflict • Provision of social insurance • Provision of predictable macroeconomic stability • Note: These institutions are correlated and it is not clear which of these institutions matter most; and “transitional institutions” may help in the development process Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-55 Role of Institutions • Acemoglu, Johnson, and Robinson’s “reversal of fortune” and extractive institutions • Bannerjee and Iyer, “property rights institutions.” Landlords versus cultivators Copyright ©2015 Pearson Education, Inc. All rights reserved. 2-56 Concepts for Review • • • • • • • Absolute poverty Brain drain Capital stock Convergence Crude birth rate Dependency burden Depreciation (of the capital stock) • Diminishing Marginal Utility • Divergence Copyright ©2015 Pearson Education, Inc. All rights reserved. • • • • Economic Institutions Fractionalization Free trade Gross domestic product (GDP) • Gross national income (GNI) • Human capital • Human Development Index (HDI) 2-57 Concepts for Review (cont’d) • • • • • Imperfect market Incomplete information Infrastructure Least developed countries Low-income countries (LICs) • Middle-income countries • Newly industrializing countries (NICs) Copyright ©2015 Pearson Education, Inc. All rights reserved. • Purchasing power parity (PPP) • Research and development (R&D) • Resource endowment • Terms of trade • Value added • World Bank 2-58 Chapter 3 Classic Theories of Economic Growth and Development Objectives • How and why development does or does not take place Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-2 3.1 Classic Theories of Economic Development: Four Approaches • Linear stages of growth model • Theories and Patterns of structural change • International-dependence revolution • Neoclassical, free market counterrevolution Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-3 3.2 Development as Growth and Linear-Stages Theories • A Classic Statement: Rostow’s Stages of Growth • Harrod-Domar Growth Model (sometimes referred to as the AK model) Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-4 3.2 Development as Growth and Linear-Stages Theories • Process of development as a series of successive stages of economic growth. - Enablers: saving, investment, and foreign aid • A Classic Statement: Rostow’s Stages of Growth – Country passes through sequential stages in achieving development. – Saving → investment → economic growth Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-5 The Harrod-Domar Model (AK) • Y = AK – A is constant – K is capital • Growth rate of gross domestic product (g) depends directly on the national net savings rate (s) and inversely on the national capital-output ratio (c). Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-6 The Harrod-Domar Model Simplified Version Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-7 The Harrod-Domar Model Simplified Version Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-8 The Harrod-Domar Model – Incorporating Capital Depreciation • Equation 3.7 is also often expressed in terms of gross savings, in which case the growth rate is given by (3.7’) where δ is the rate of capital depreciation • But there is now growing evidence of “per capita income convergence,” weighting changes in per capita income by population size • (Also, in chapter 3, we return to examine the concept of conditional convergence when we study the Solow model) Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-9 Criticisms of the Stages Model • Limitations of the Harrod-Domar Growth Model – Increasing savings ratios in lower-income countries is difficult. Extra income earned is spent on more consumption – Dis-functional financial system – Higher productivity (reducing the capital output ratio) is hard to achieve. Capital is used inefficiently – Filling the savings gap by borrowing from overseas will bring a debt burden Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-10 Criticisms of the Stages Model • Necessary versus sufficient conditions – Saving and investment are both necessary conditions for growth but they are not sufficient conditions • For growth to continue, social, institutional, and attitudinal changes may also have to take place. Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-11 3.3 Structural-Change Models • Structural-change theory The hypothesis that underdevelopment is due to underutilization of resources. • Development needs more than just accelerated capital formation. • Structural transformation The process of transforming an economy: the contribution to national income by the manufacturing sector eventually surpasses the agricultural sector. Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-12 3.3 Structural-Change Models • The Lewis two-sector model • Surplus of labor: move labor from agricultural sector to the industrial one without loss of output • Modern sector has growth of output • Profits generated over wages (no fear that wages will rise) get reinvested Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-13 Figure 3.1 The Lewis Model of Modern-Sector Growth in a Two-Sector Surplus-Labor Economy Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-14 Criticisms of the Lewis Model • Rate of labor transfer and employment creation may not be proportional to rate of modern-sector capital accumulation – (fig 3.2 where KM2 technology requires less labor per unit of output than Km1) • Surplus labor in rural areas and full employment in urban? – Data indicates that there is little labor surplus in rural, developing countries • Model assumes that wages in the modern sector remain constant. Evidence showed that wages tend to rise in many developing countries. Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-15 Figure 3.2 The Lewis Model Modified by Laborsaving Capital Accumulation: Employment Implications Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-16 Criticisms of the Lewis Model • Institutional factors? • The transfer of unskilled workers from agriculture to industry is regarded as almost smooth and costless • Assumption of diminishing returns in modern industrial sector – Evidence from some developing countries shows increasing returns prevailing in that sector Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-17 Structural Change and patterns of Development Analysis • Similar to the Lewis model, this model focuses on structural change as economic development takes the form of sequential process • Economic, industrial and institutional structure of the economy is transformed to allow new industries to replace traditional agriculture over time Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-18 Empirical Patterns of Development - Examples • Switch from agriculture to industry (and services) • Rural-urban migration and urbanization • Steady accumulation of physical and human capital • Population growth first increasing and then decreasing with decline in family size Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-19 3.4 The InternationalDependence Revolution • International-dependence models view developing countries as troubled by institutional, political, and economic rigidities, both domestic and international, and caught up in a dependence and dominance relationship with rich countries. Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-20 3.4 The InternationalDependence Revolution • Within this general approach of International-dependence models there are three major streams of thought 1. The neo-colonial dependence model 2. The false-paradigm model 3. The dualistic-development thesis. Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-21 3.4 The InternationalDependence Revolution • 1. The neocolonial dependence model – Legacy of colonialism, Unequal power, Core-periphery – Emphasizes the unequal power relationships between the developed and less developed countries – Blames underdevelopment on conscious or unconscious developed country exploitation – Inequality within each developing country, where a small ruling elite controls the means of production. Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-22 3.4 The InternationalDependence Revolution • 2. The false-paradigm model – Pitfalls of using “expert” foreign advisors who misapply developed-country models • 3. The dualistic-development thesis – Superior and inferior elements can coexist e.g. traditional and modern methods of production leading to a coexistence of wealth and poverty – This coexistence is chronic and not merely transitional Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-23 3.4 The InternationalDependence Revolution • Criticisms and limitations of the International Dependence Revolution – Does little to show how to achieve development in a positive sense Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-24 3.5 The Neoclassical Counterrevolution: Market Fundamentalism • This theory is also known as neo-liberal theory. • 1980s and 1990s, the neoclassical or free-market counterrevolution approach prevailed. • It emphasizes the beneficial role of free markets, open economies, and the privatization of inefficient public enterprises. • Failure to develop, according to this theory, is not due to exploitive internal and external forces as expounded by dependence theorists. Rather, it is primarily the result of too much government intervention and regulation of the economy. Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-25 3.5 The Neoclassical Counterrevolution: Market Fundamentalism • The neo-classical approach states that underdevelopment arises from: • Poor resource allocation due to incorrect price policies, and Government’s intervention in the economic activities. • Neo-classical or neo-liberal approach states that economic growth can be put to spur by: – – – – – Permitting competitive free markets to flourish, Privatising state-owned enterprises, Promoting free trade and export expansions, Welcoming investors from developed economies, and Eliminating the excessive amount of government regulations and price distortions in factor, product and market. Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-26 3.5 The Neoclassical Counterrevolution: Market Fundamentalism • Challenging the Statist Model: Free Markets, Public Choice, and Market-Friendly Approaches • Free market approach – Economies free of government regulations perform better • Public Choice approach – Governments corrupt and inefficient since individuals use them to pursue own agenda • Market-friendly approach – Government should only intervene in case of market failure Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-27 3.5 The Neoclassical Counterrevolution: Market Fundamentalism • Main Arguments – Denies efficiency of intervention – Points up state owned enterprise failures – Stresses government failures – Traditional neoclassical growth theory - with diminishing returns, cannot sustain growth by capital accumulation alone Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-28 The Solow model • due to Robert Solow, won Nobel Prize for contributions to the study of economic growth • a major paradigm: – widely used in policy making – benchmark against which most recent growth theories are compared • looks at the determinants of economic growth and the standard of living in the long run Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-29 The production function • In aggregate terms: • Define: Y = F (K, L) y = Y/L = output per worker k = K/L = capital per worker • Assume constant returns to scale: zY = F (zK, zL ) for any z > 0 • Pick z = 1/L. Then Y/L = F (K/L, 1) y = F (k, 1) y = f(k) where f(k) = F(k, 1) f(k) is the per worker production function Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-30 Saving and investment • saving (per worker) = sy • National income identity is y = c + i Rearrange to get: i = y – c = sy • Using the results above, i = sy = sf(k) Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-31 Output, consumption, and investment Output per worker, y f(k) c1 sf(k) y1 i1 k1 Copyright ©2015 Pearson Education, Inc. All rights reserved. Capital per worker, k 3-32 Depreciation Depreciation per worker,  k  = the rate of depreciation = the fraction of the capital stock that wears out each period k  1 Capital per worker, k Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-33 Capital accumulation The basic idea: Investment increases the capital stock, depreciation reduces it. Change in capital stock k = investment – depreciation = i – k Since i = sf(k) , this becomes: k = s f(k) – k Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-34 The equation of motion for k • With population growth, the equation of motion for k is: k = s f(k) − ( + n) k actual investment Copyright ©2015 Pearson Education, Inc. All rights reserved. break-even investment 3-35 Figure A3.2.1 Equilibrium in the Solow Growth Model Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-36 Figure A3.2.2 The Long-Run Effect of Changing the Saving Rate in the Solow Model Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-37 The Solow model diagram k = s f(k) − ( +n)k ( + n ) k sf(k) k* Copyright ©2015 Pearson Education, Inc. All rights reserved. Capital per worker, k 3-38 The impact of population growth ( +n2) k ( +n1) k An increase in n sf(k) leads to a lower steady-state level of k. k 2* Copyright ©2015 Pearson Education, Inc. All rights reserved. k1* Capital per worker, k 3-39 Growth and the PPF • Production possibility curve • A curve on a graph indicating alternative combinations of two commodities or categories of commodities (e.g., agricultural and manufactured goods) that can be produced when all the available factors of production are efficiently employed. Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-40 PPF • Production possibility curve and the effects on growth – Effects of physical and human resources – Effects of capital stock and land – Effects of technology Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-41 Figure A3.1.1 Effect of Increases in Physical and Human Resources on the Production Possibility Frontier Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-42 Figure A3.1.2 Effect of Growth of Capital Stock and Land on the Production Possibility Frontier Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-43 Figure A3.1.3 Effect of Technological Change in the Agricultural Sector on the Production Possibility Frontier Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-44 Figure A3.1.4 Effect of Technological Change in the Industrial Sector on the Production Possibility Frontier Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-45 3.6 Classic Theories of Development: Reconciling the Differences • Governments do fail, but so do markets; a balance is needed • Must attend to institutional and political realities in developing world • Development economics has no universally accepted paradigm • Insights and understandings are continually evolving • Each theory has some strengths and some weaknesses Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-46 Concepts for Review • • • • • • • • • Autarky Average product Capital-labor ratio Capital-output ratio Center Closed economy Comprador groups Dependence Dominance Copyright ©2015 Pearson Education, Inc. All rights reserved. • • • • • Dualism False-paradigm model Free market Free-market analysis Harrod-Domar growth model • Lewis two-sector model • Marginal product • Market failure 3-47 Concepts for Review (cont’d) • Market-friendly approach • Necessary condition • Neoclassical counterrevolution • Neocolonial dependence model • Net savings ratio • New political economy approach • Open economy • Patterns-of-development analysis • Periphery Copyright ©2015 Pearson Education, Inc. All rights reserved. • • • • • • • • • • Production function Public-choice theory Self-sustaining growth Solow neoclassical growth model Stages-of-growth model of development Structural-change theory Structural transformation Sufficient condition Surplus labor Underdevelopment 3-48 Appendix 3.1: Components of Economic Growth • Capital Accumulation, investments in physical and human capital – Increase capital stock • Growth in population and labor force • Technological progress – Neutral, labor/capital-saving, labor/capital augmenting Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-49 Appendix 3.2 The Solow Neoclassical Growth Model Y L = f (K L ,1) or y = f (k ) Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-50 Appendix 3.2 The Solow Neoclassical Growth Model Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-51 Appendix 3.2 The Solow Neoclassical Growth Model Copyright ©2015 Pearson Education, Inc. All rights reserved. 3-52 Chapter 8 Human Capital: Education and Health in Economic Development 8.1 The Central Roles of Education and Health • Health and education are important objectives of development, as reflected in Amartya Sen’s capability approach, and in the core values of economic development • Health and education are also important components of growth and development – inputs in the aggregate production function Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-2 Education and Health as Joint Investments for Development • These are investments in the same individual • Greater health capital may improve the returns to investments in education – Health is a factor in school attendance – Healthier students learn more effectively – A longer life raises the rate of return to education – Healthier people have lower depreciation of education capital Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-3 Education and Health as Joint Investments for Development • Greater education capital may improve the returns to investments in health –Public health programs need knowledge learned in school –Basic hygiene and sanitation may be taught in school –Education needed in training of health personnel Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-4 Improving Health and Education: Increasing Incomes Is Not Sufficient • Increases in income often do not lead to substantial increases in investment in children’s education and health • But better educated mothers tend to have healthier children at any income level • Significant market failures in education and health require policy action Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-5 Figure 8.1 Age-Earnings Profiles by Level of Education: Venezuela Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-6 8.2 Investing in Education and Health: The Human Capital Approach • Initial investments in health or education lead to a stream of higher future income • The present discounted value of this stream of future income is compared to the costs of the investment • Private returns to education are high, and may be higher than social returns, especially at higher educational levels Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-7 Figure 8.2 Financial Trade-Offs in the Decision to Continue in School Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-8 Table 8.1 Returns to Investment in Education by Level, Regional Averages (%) Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-9 8.3 Child Labor • Child labor is a widespread phenomenon • The problem may be modeled using the “multiple equilibria” approach • Government intervention may be called for to move to a ‘better’ equilibrium • Sometimes this shift can be self-enforcing, so active intervention is only needed at first Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-10 Assumptions of the Child Labor Multiple Equilibria Model • 2 assumptions to model child labor : – Luxury (wealth) Axiom: A household with sufficiently high income would not send its children to work – Substitution Axiom: Adult and child labor are substitutes, in which the quantity of output by a child is a given fraction of that of an adult: QC = γQA, 0 < γ < 1. – Labor is unskilled labor – Supply of labor is in adult equivalents Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-11 Figure 8.3 Child Labor as a Bad Equilibrium Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-12 Other approaches to child labor policy • Get more children into school (as in Millennium Development Goals), e.g. new village schools; and enrollment incentives for parents (e.g. in Brazil) • Consider child labor an expression of poverty, so emphasize ending poverty generally • If child labor is inevitable in the short run, regulate it to prevent abuse and provide support services for working children (UNICEF approach) • Ban child labor; or if impossible, ban child labor in its most abusive forms (ILO strategy; “Worst Forms of Child Labor Convention”) • Activist approach: trade sanctions. Concerns: could backfire when children shift to informal sector; and if modern sector growth slows Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-13 8.4 The Gender Gap: Discrimination in Education and Health • Young females receive less education than young males in nearly every low and lower-middle income developing country • Closing the educational gender gap is important because: – The social rate of return on women’s education is higher than that of men in developing countries – Education for women increases productivity, lowers fertility – Educated mothers have a multiplier impact on future generations – Education can break the vicious cycle of poverty and inadequate schooling for women – Good news: Millennium Development Goals on parity being approached, progress in every developing region Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-14 Figure 8.4 Youth Literacy Rate, 2008 Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-15 The “Missing Women” Crisis • Research has concluded that in Asia at least 100 million women or more are “missing” • Some women are also missing in Africa, but a much smaller proportion • Reasons include inferior medical care for girls, and gender selective abortion or female infanticide Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-16 Figure 8.5 Estimated Percent of Women “Missing” Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-17 8.5 Educational Systems and Development • The Political Economy of Educational Supply and Demand: The Relationship between Employment Opportunities and Educational Demands – Demand: desire for education is influenced by future earnings and cost of schooling – Supply: determined largely by the political process (unrelated to the economics) Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-18 8.5 Educational Systems and Development • Social versus Private Benefits and Costs – Private benefits: benefits that accrue directly to an individual economic unit. For example, private benefits of education are those that directly accrue to a student and his or her family – Social benefits of education: Benefits of the schooling of individuals, including those that accrue to others or even to the entire society, such as the benefits of a more literate workforce and citizenry. – Social costs of education: Costs borne by both the individual and society from private education decisions, including government education subsidies. Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-19 Figure 8.6 Private versus Social Benefits and Costs of Education: An Illustration Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-20 8.5 Educational Systems and Development • Distribution of Education – Lorenz curves for the distribution of education • Education, Inequality, and Poverty – Countries that have developed successfully have generally ensured that educational benefits are more broadly available in the economy—to the poor as well as the rich, in the rural areas as well as the urban. Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-21 Figure 8.7 Lorenz Curves for Education in India and South Korea Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-22 8.5 Educational Systems and Development (cont’d) • In many developing countries the educational system tends to increase inequality • Educational supply and demand: the relationship between employment opportunities and educational demands • Social versus private benefits and costs – The private cost of education is higher for poor families (the opportunity cost of sending kids to school) while expected benefit is lower Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-23 8.5 Educational Systems and Development (cont’d) • Education, Internal Migration, and the Brain Drain – Education influences rural-urban migration and also immigration • Brain Drain: the emigration of highly educated and skilled professionals and technicians from the developing countries to the developed world. Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-24 8.6 Health Measurement and Distribution • World Health Organization (WHO): The key United Nations agency concerned with global health matters. • Life expectancy improved in most regions Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-25 Figure 8.9 Proportion of Children under 5 Who Are Underweight, by Household Wealth, around 2008 Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-26 8.7 Disease Burden • HIV/AIDS • Malaria • Parasitic Worms and Other “Neglected Tropical Diseases” Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-27 Figure 8.11 Global HIV Trends, 1990–2011 Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-28 Table 8.2 Regional HIV and AIDS Statistics, a Decade of Bending the Curve, 2011 versus 2001 Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-29 8.8 Health, Productivity, and Policy • Productivity – Is there a connection? – Studies showed that healthier people earn higher wages • Health Systems Policy – health system is “all the activities whose primary purpose is to promote, restore, or maintain health.” (WHO definition) – Great variability in the performance of health systems at each income level among countries Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-30 Figure 8.12 Wages, Education, and Height of Males in Brazil and the United States Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-31 Concepts for Review • Acquired immunodeficiency syndrome (AIDS) • Basic education • Brain drain • Conditional cash transfer (CCT) programs • Derived demand • Discount rate • Educational certification • Educational gender gap Copyright ©2015 Pearson Education, Inc. All rights reserved. • Health system • Human capital • Human immunodeficiency virus (HIV) • Literacy • Neglected tropical diseases • Private benefits of education 8-32 Concepts for Review (cont’d) • • • • Private costs of education Social benefits of education Social costs of education World Health Organization (WHO) Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-33 Algebraic version of the schooling decision diagram (Note: you can also do a rate of return calculation as in Endnote 19) Net present value of Income Stream is given by Yt - Xt - Ct NPV = å t (1+ r) t (Compare with Equation 11.10) Where: t is time (year) from present. (The present is time t = 0.) Yt is expected income from having gone to school, realized at time t Xt is expected income from having NOT gone to school, at time t Ct is the cost of going to school borne at time (if any) r is the rate of discount used Copyright ©2015 Pearson Education, Inc. All rights reserved. 8-34 Chapter 11 Development Policymaking and the Roles of Market, State, and Civil Society 11.1 A Question of Balance • Roles and Limitations of State, Market, and the Citizen Sector/NGOs in Achieving Economic Development and Poverty Reduction Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-2 11.2 Development Planning: Concepts and Rationale • The Planning Mystique (magic) – In the past, few doubted the importance and usefulness of national economic plans – Recently, however, disillusionment has set in – But a comprehensive development policy framework can play an important role in accelerating growth and reducing poverty Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-3 11.2 Development Planning: Concepts and Rationale (cont’d) • The nature of development planning resource mobilization for public investment – Economic policy to control private economic activity according to social objectives formulated by government • Planning in mixed developing economies • Private sector in mixed economies comprises – – – – – The subsistence sector Small scale businesses Medium size enterprises Larger domestic firms Large joint or foreign owned enterprises Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-4 11.2 Development Planning: Concepts and Rationale (cont’d) • The Rationale for Development Planning – – – – Market failure Resource mobilization and allocation Attitudinal or psychological impact Requirement to receive foreign aid Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-5 Three General Forms of Market Failure • Market Failure Forms: • The market cannot function properly or no market exists • The market exists but implies inefficient resource allocation • More expansively: the market produces undesirable results as measured by social objectives other than the allocation of resources – Often items such as more equal income distribution, and “merit goods” such as health, are treated as separate rationales for policy, outside of economic efficiency Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-6 Market Failure • Market failures can occur when social costs or benefits differ from private costs or benefits of firms or consumers • Market power (monopolistic, monopsonistic) • Public goods: free riders cannot be excluded except possibly at high cost • Externalities: agents do not have to pay all costs of their activities, or are unable to receive all the benefits • Capital markets are particularly prone to failure Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-7 Market and Government Failure: Broader Arguments • Government failure: in many cases, politicians and bureaucrats can be considered utility maximizers, not public interest maximizers • Developing countries tend to have both high market failure and high government failures Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-8 11.3 The Development Planning Process: Some Basic Models • Characteristics of the planning process • Planning in stages: basic models – Aggregate growth models – Multisector input-output, social accounting, and CGE models • Three stages of planning – Aggregate – Sectoral – Project Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-9 11.3 The Development Planning Process: Some Basic Models (cont’d) Aggregate Growth Models: Projecting Macro Variables K (t ) = cY (t ) (11.1) Where K(t) is capital stock at time t Y(t) is output at time t c is the average and marginal capital-output ratio Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-10 11.3 The Development Planning Process: Some Basic Models (Aggregate Growth Models, cont’d) (11.2) Where I(t) is gross investment at time t s is the savings rate S is national savings  is the depreciation rate If g is the targeted rate of output growth, then (11.3) Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-11 11.3 The Development Planning Process: Some Basic Models (Aggregate Growth Models, cont’d) (11.4) (11.5) (11.6) Where n is the labor force growth rate and p is the growth rate of labor productivity Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-12 11.3 The Development Planning Process: Some Basic Models (Aggregate Growth Models, cont’d) (11.7) Where W and  are wage and profit incomes (11.8) Where s and sW are the marginal propensities to save from wage income and profit Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-13 11.3 The Development Planning Process: Some Basic Models (Aggregate Growth Models, cont’d) (11.9) Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-14 11.3 The Development Planning Process: Some Basic Models (cont’d) • Multisector Models and Sectoral Projections • Interindustry or input-output models – Activities (output) of one sector are seen as users of inputs from other industries Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-15 11.3 The Development Planning Process: Some Basic Models (cont’d) • Project Appraisal and Social Cost-Benefit Analysis • Basic concepts and methodology • To weight the advantages and disadvantages to society as a whole. • Computing shadow prices (prices which reflect the opportunity cost of capital) – Often market prices in developing countries do not accurately reflect market prices because of a number of factors such as: inflation, tariffs, subsidies, over or undervalued currency and other market distortions • Calculating the social rate of discount Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-16 11.3 The Development Planning Process: Some Basic Models (Project Appraisal and Social Cost-Benefit Analysis, cont’d) Net present value, or NPV is given by Bt - Ct NPV = å t t (1+ r) (11.10) Where Bt is the expected benefit at time t Ct is the expected cost at time t r is the social rate of discount used Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-17 11.3 The Development Planning Process: Some Basic Models (Project Appraisal and Social Cost-Benefit Analysis, cont’d) • Choosing projects: some decision criteria – NPV rule – Use the IRR as a decision criterion • Compare the internal rate of return (the return when NPV=0) with an interest rate to decide whether to accept the project or not Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-18 11.4 Government Failure and Preferences for Markets over Planning • The 1980s policy shift toward free markets Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-19 11.4 Government Failure and Preferences for Markets over Planning (cont’d) • • • • • Problems of Plan Implementation and Plan Failure Theory versus practice Deficiencies in the plans and their implementation Insufficient and or unreliable data Unanticipated economic disturbances external (e.g. sudden stop of foreign capital inflow), and internal (e.g. change in oil prices) • Institutional weaknesses • Lack of political will • Conflict, post-conflict, and fragile states Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-20 11.5 The Market Economy • Well functioning market economy requires – – – – – – – – – – – – Clear property rights Laws and courts Freedom to establish business Stable currency Public supervision of natural monopolies Provision of adequate information Autonomous tastes (protection of consumers preferences from the influence of powerful producers) Public management of externalities Stable monetary and fiscal policy instruments Safety nets Encouragement of innovation Security from violence Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-21 11.5 The Market Economy (cont’d) • The “Washington Consensus” (in the 80s and 90s) on the Role of the State in Development and its Limitations • The consensus reflected a free market approach to development espoused by the IMF, the World bank, and key U.S. government agencies • However, it did not always accord with realities in developing countries that were successful (see Box 11.1) Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-22 Box 11.1 The Washington Consensus and East Asia Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-23 11.6 The Washington Consensus on the Role of the State in Development and Its Subsequent Evolution • Toward a new consensus starting in 1998 – New emphasis on government's responsibility toward poverty alleviation and inclusive growth – Importance of health and education – A recognition that markets can fail – Governments can help secure conditions for an effective market based economy Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-24 11.7 Development Political Economy: Theories of Policy Formulation and Reform • Understanding voting patterns on policy reform – Sometimes voters reject a policy from which the majority will benefit (lack of information) • Democracy versus autocracy: which facilitates faster growth? Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-25 Figure 11.1 Global Trends in Governance, 1946-2008 Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-26 11.8 Development Roles of NGOs and the Broader Citizen Sector • NGOs are non government organization meant to provide financial and technical support for development purposes • Potentially important roles in: – Helping poor countries design and implement programs focused on poverty reduction – Economic and productive ideas – Specialized technical knowledge – Trust and Credibility – Representation and advocacy Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-27 Other limitations: “voluntary failure” – NGOs may be… • Insignificant, owing to small scale and reach. • Lacking necessary local knowledge to develop and implement an appropriate mix of programs to address relevant problems • Lacking adequate incentives to ensure effectiveness • Captured by goals of funders rather than intended beneficiaries; may change priorities one year to the next • Giving too little attention to means—such as fundraising—can become ends in themselves • Lacking immediate feedback (as private firms get in markets, or elected governments receive at the polls); this can let the weaknesses go on for some time before being corrected Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-28 11.9 Trends in Governance and Reform • Dealing with the problem of Corruption – Control of public resources through the abuse of official power or influence (Abuse of public trust for private gain) • Decentralization – Developed countries have given more power to state and local governments • Development participation– Genuine participation by the people and role of NGOs Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-29 Figure 11.3 Corruption as a Regressive Tax: The Case of Ecuador Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-30 Figure 11.4 The Association between Rule of Law and Per Capita Income Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-31 11.9 Trends in Governance and Reform (cont’d) • Good governance enhances capability to function • Effects of corruption fall disproportionately on the poor • Good governance is broader than simply an absence of corruption Copyright ©2015 Pearson Education, Inc. All rights reserved. 11-32 Concepts for Review • • • • • • • Accounting prices Aggregate growth model Comprehensive plan Corruption Cost-benefit analysis Economic infrastructure Economic plan Copyright ©2015 Pearson Education, Inc. All rights reserved. • • • • • • • • Economic planning Government failure Input-output model Interindustry model Internal rate of return Market failure Market prices Net present value 11-33 Concepts for Review (cont’d) • Nongovernmental organization (NGO) • Partial plan • Path dependency • Planning process • Political will • Project appraisal Copyright ©2015 Pearson Education, Inc. All rights reserved. • • • • • Rent seeking Shadow prices Social profit Social rate of discount Voluntary failure 11-34
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Runnning Head: THE PROCESS OF ECONOMIC DEVELOPMENT REVIEW

Name
Student id
James M Cypher
The Process of Economic Development
Published in 2014
Published in 711 Third Avenue, New York, NY 10017
Published by Routledge an imprint of the Taylor & Francis Group
736 pages
Price Paperback: € 65.00

1

THE PROCESS OF ECONOMIC DEVELOPMENT REVIEW

2

THE PROCESS OF ECONOMIC DEVELOPMENT REVIEW
Introduction
Nations, as well as the world, depends on what they have in their economy to work
towards development. When we talk of development, we mean the appreciable of people’s
standard of living by improving their lives generally. As such, we can see a good example in the
developing countries in which they have come a long way since the 1990s. For instance, they
increased their participation in the world trade form 25% to 47% from 1990-2010. Even then,
there are those countries that have shown next to no development in their economy due to other
factors. Within this book, economic development is determined by how a state uses its surplus in
the economy that is the difference between the total values production annually and the portion
used by the same economy to reproduce itself. Within this book, it concentrates on the different
ways of economic development, how it can be achieved as well as show how people fail to invest
in economic development completely. Economic development plays a great role in a nation’s
growth and general development hence the necessity of the process of economic development.
The process of economic development is a book that has been written from the first edition, and
every time a new edition is published, and it included updated information on things that keep on
changing in the economy, especially in a matter of years. In as much economic development is a
global aspect, the developing countries do, at times, make tremendous changes in their economic
developments as years go by. Sure they cannot reach the level of economic development of the
developed countries, but their progress is well notable within their economic development.

Background of the Author

THE PROCESS OF ECONOMIC DEVELOPMENT REVIEW

3

The process of economic development the fourth edition is written by James Cypher.
James Cypher works at California State University, Fresno, USA, as an Emeritus Professor of
the economy as well as in a doctoral program and researcher in development studies in Mexico at
the Universidad Autónoma de Zacatecas. In addition to the process of economic development, he
has written other books like State and...


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